QSBC purification transactions must respect the FIFO rule in s. 110.6(14)(a)

In order that shares of a Canadian-controlled private corporation will qualify for the enhanced capital gains exemption, taxpayers may engage in "purification" transactions so that the CCPC does not have excess cash at the time of sale to the purchaser.

A technical interpretation points out a trap.  The individual taxpayers transfer recently-purchased shares of their CCPC (the "new shares") on a rollover basis to a Holdco, with Holdco then redeeming those shares to extract the excess CCPC cash. The taxpayers then sell their "old" shares of the CCPC to the purchaser, thereby satisfying the 24-month holding period requirement in the qualified small business corporation share definition.

Wrong!  S. 110.6(14)(a) deems identical shares to have been disposed of on a FIFO basis for QSBC purposes, so that the taxpayers will be deemed to have disposed of all of their new shares to the purchaser, thereby flunking the 24-month holding period test for those shares.

Neal Armstrong.  Summary of 2 May 2013 T.I. 2013-0481361E5 F under s. 110.6(14)(a).